Reforms under the government's Economic Recovery and Growth Plan have resulted in significant strides in strengthening the business environment and steps to improve governance. However, all these factors have not yet boosted non-oil non-agricultural activity, brought inflation close to the target range, contained banking sector vulnerabilities, or reduced unemployment. A higher fiscal deficit driven by weak revenue mobilization amidst still tight domestic financing conditions has raised bond yields, and crowded out private sector credit.

Higher oil prices are supporting the near-term projections, but medium-term projections indicate that growth would remain relatively flat, with continuing declines in per capita real GDP under unchanged policies. The improved outlook for oil prices is expected to provide welcome relief from pressures on external and fiscal accounts, and growth would pick up to 2.1 percent in 2018, helped by the full year impact of greater foreign exchange availability and recovering oil production. Renewed import growth would reduce gross reserves despite continued access to international markets. After arrears clearance in 2018, the fiscal deficit would narrow, and public debt levels would remain relatively low, but the interest payments-to-Federal Government revenue ratio would remain high.

Risks are balanced. Lower oil prices and tighter external market conditions are the main downside risks. Domestic risks include heightened security tensions, delayed fiscal policy response, and weak implementation of structural reforms. Stress scenarios highlight sensitivity of external and public debt, particularly to oil exports and naira depreciation. Faster than expected implementation of infrastructure projects are an upside risk. A further uptick in international oil prices would provide positive spillovers into the non-oil economy.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Nigeria's exit from recession and the strong recovery in foreign exchange reserves, helped by rising oil prices and new foreign exchange measures. They commended the progress in implementing the Economic Recovery and Growth Plan, including the start of a convergence in foreign exchange windows, tight monetary policy, improvements in tax administration, and significant strides in improving the business environment. Directors noted, however, that important challenges remain, as growth in the non?oil, non?agricultural sector has not picked up; inflation remains high and sticky; unemployment is rising; and poverty is high. To address these vulnerabilities, they stressed that comprehensive and coherent policy actions remain urgent.

Directors emphasized the need for a growth?friendly fiscal adjustment, which frontloads non?oil revenue mobilization and rationalizes current expenditure to reduce the ratio of interest payments to revenue to a more sustainable level and create space for priority social and infrastructure spending. In addition to ongoing efforts to improve tax administration, Directors underlined the need for more ambitious tax policy measures, including through reforming the value?added tax, increasing excises, and rationalizing tax incentives. The implementation of an automatic fuel price?setting mechanism, sound cash and debt management, improved transparency in the oil sector, increased monitoring of the fiscal position of state and local governments, and substantially scaled-up social safety nets should support the adjustment.

Directors commended the central bank's tightening bias in 2017, which should continue until inflation is within the single digit target range. They recommended continued strengthening of the monetary policy framework and its transparency, with a number of Directors urging consideration of a higher monetary policy rate, a symmetric application of reserve requirements, and no direct central bank financing of the economy. A few Directors urged confirmation of the appointments of the central bank's board of directors and members of the monetary policy committee.

Directors stressed that rising banking sector risks should be contained. They welcomed the central bank's commitment to help increase capital buffers by stopping dividend payments by weak banks. They called for an asset quality review to identify any potential capital need. They noted that an enhanced risk?based banking supervision, strict enforcement of prudential requirements, and a revamped resolution framework would help contain risks.

Directors emphasized that structural reform implementation should continue to lay the foundation for a diversified private?sector?led economy. They noted that, building on recent improvements in the business environment, implementing the power sector recovery plan, investing in infrastructure, accelerating efforts to strengthen anti?corruption and transparency initiatives, and updating and implementing the financial inclusion and gender strategies remain essential.

Directors welcomed the continued improvement in the quality and availability of economic statistics and encouraged further efforts to address remaining gaps.

It is expected that the next Article IV consultation with Nigeria will take place on the standard 12?month cycle.

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